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Escaping the Poverty Trap

July 11, 2011 8:00 PM

Joe DeCapua

Zambian President Rupiah Banda, left, toasts with Chinese President Hu Jintao after a signing ceremony for mining, trade and cultural agreements in Beijing, Feb. 25, 2010. Zambia and Ghana are now ranked as middle income countries by World Bank. (file pho

Economists say two African nations have escaped what they call the poverty trap.

The World Bank recently released its annual assessment of poor nations and raised the status of two sub-Saharan African countries. Zambia and Ghana have been upgraded from low income to middle income countries.

Poverty Trap

“Economists had thought in the past that some countries were stuck at a very low level of development and there’s not much you could do about it,” said Andrew Sumner, research fellow at the Institute for Development Studies at the University of Sussex.

This was blamed on a number of reasons, including colonial history, conflict and being landlocked, with no access to seaports.

“But increasingly it seems that group of the world’s poorest countries is getting smaller and smaller,” said Sumner. “And even the world’s poorest countries can actually get rich, at least in average income terms. Although there are some big question marks about the extent of poverty reduction.”

Higher incomes

The World Bank looks at per capita income to help determine whether a country has climbed out of poverty.

“The World Bank,” said Sumner, “has for the last 20 or 30 years, every year, had a look at which countries are low income and which countries are middle income. And then the aid agencies use the categories in various ways with other indications to determine who gets aid and how much.”

The threshold, this year, he said, is just over $1,000 per person per year. Ghana and Zambia have risen above that level.

“Part of the story with Ghana is the data has been better collected or better calculated, but also Ghana’s been going through a process of economic growth for some time now,” he said.

Aid

There has been debate over the years on the role played by international aid. Does it help or hurt a country in the long run?

“It’s incredibly difficult to separate out causal factors,” Sumner said. “What we can say is aid neither provides all the answers nor is it disastrous as some critics have suggested. What it does is it supplements domestic resources. It also supplements resources from the international private sector and Ghana has a lot of foreign investment.”

International aid is credited with helping lower infant mortality and improving education in poor countries. “Aid is pretty good at that social sector stuff,” he said.

However, Zambia and Ghana are credited with expanding their economic base. “Overall, it seems a bunch of things have contributed and aid is part of that recipe in development,” he said.

“What it means initially is less preferential aid financing, particularly from the World Bank when it lends money below the market rate of interest. As countries go through this transition from low income to middle income status the terms, (when) they borrow money from the World Bank, become less good,” he said.

Nevertheless, some say there’s an upside to that.

In Ghana, he said, “Some of the government ministers have said they…prefer that because, although it’s slightly more expensive or perhaps quite a bit more expensive to borrow from the private sector, it actually comes with less strings. And so that’s…convenient for the government.”

Low income

The World Bank said 35 countries remain on its low income list, including Tanzania, the DRC and Ethiopia. They have a combined population of around 800 million.

“One could think of that category as the group of poorest countries in the world. They still have access to concessionary finance from the World Bank and aid money, more generally, on better terms than countries who aren’t in that group. They account for perhaps a quarter of the world’s poor. Most of the world’s poor are in middle income countries like India, Nigeria, Pakistan,” he said.

Sumner believes that over the next 20 years there will be fewer poor countries. “Projections for 2025 suggest this group might be, I suspect, in the range of 20 or 25 countries. And those countries will be largely in sub-Saharan Africa and they’ll be fragile states,” he said.

While it’s good news that the number of low income countries will decline, Sumner said more attention still needs to be paid poverty reduction. He said poverty is not falling as fast as it should.

It’s not just the global recession. “That could be part of it,” he said, “I suspect there (are) also aspects about inequality and population growth playing a big part here.”

Another fact affecting growth will be the demand by China and India for natural resources and goods produced in low income countries.